Introduction to Business Planning for Ecological Farmers and Foresters

Why Write a Business Plan
There are many reasons why we may want or need to write a business plan, but commonly:
 * To assist the day to management of the business, for example to plan investments without compromising your cash flow or to identify the areas of your business that need attention.
 * To plan a significant change. This might be converting to organic farming, introducing a new enterprise, expansion, or switching from supplying a supermarket or wholesaler to direct marketing.
 * To apply for a loan, grant, or to support a planning application.

The Business Planning Process
A traditional approach to a business planning process might start with research and analysis of your situation, resources, capacities, competitors, potential customers, etc then let your business strategy and objectives emerge from the data. If you can clearly identify your customers and predict all your sales and production costs, this is a really strong position to be in. This kind of approach is useful for managing an existing business,for planning growth and investment, for example. Also, this kind of managerial business planning is often how you want to present yourself to institutions (banks, governments, trusts, etc) when seeking finance, regardless of your actual process.

However, planning the establishment or significant development of a business often follows a very different logic. Markets are often not clearly defined before people create them, and people often adapt their product or marketing strategy in response to their experience of making sales or not. We commit by investing in our productive capacity, then find the markets. During this process, plans meet reality, and successful businesses will abandon failing strategies and take advantage of unforeseen opportunities that arise. Financial projections help you to identify worst case scenario's, and it is then up to you to decide what constitutes an affordable loss. Some people will start small and grow gradually. Others will invest everything for the possibility of rapid success, and risk the possibility of bankruptcy and financial destitution. The former approach feels more prudent, but it bears the risk that your venture might leave you trapped running a business where you compensate for your lack of equipment or infrastructure with your labor, and lack the income to invest. Business planning can be a way to convincing institutions or inverters to give or lend you money, but it is also a way to gather and analyze information to help you decide how to manage the risks of establishing a business.

Business planning can start by defining your goals. These goals can then frame and gather information and shape your strategy. This approach to business planning may be more appropriate to an industry with extra-financial purpose, especially if you are seeking finance from ethical investors or community shares. Do you want to increase your profits, reduce your workload, teach more new entrants, feed more people, influence the wider farming community, sequester carbon in the soil, rejuvenate a degraded ecosystem, or provide a rural lifestyle for yourself and a family? Start by defining your goals for yourself. Write them down and rank them according to urgency and importance.

The next question to ask yourself is how will you achieve these goals. Have you already made decisions about what to do? Do you have reasons for these decisions and have you analyzed them? What alternatives are you ruling out and why? Are other people or organizations achieving your goals in ways you have not yet thought of? You may make decisions that you cannot rationalize. For example, perhaps you fall in love with a farm and build a business plan around being able to afford it, or you know you want to work with new entrants or some particular crop, though you haven't got a reason other than you find something satisfying. The point of this process is not not that you have to rationalize every decision and commitment you make, just that it is helpful to become aware of the mosaic of values and commitments that drive your decision making process by writing them down.

This initial process might be quite quick, or it could take a fair bit of time, especially if it is a group process. Whether individually, or in a group, it can be extremely helpful to separate out the process of creative and critical thinking, as producing ideas is easier when you are not simultaneously critically evaluating them.

You could have a definite business idea, and need to gather and present the arguments and evidence to persuade people to invest time or money in your business. You might work in or for an existing farm business with data, and you would like to analyze this information to identify how best to invest your time or money to achieve certain goals.

Whatever your business planning needs, there are certain key features that are common to all business plans. Whether you are producing and selling food, or providing a service, the essence of business planning is to gather, format and analyze information about the production costs and sale prices of your product or service. You do this to make predictions about the impact of your choices on the future state of your (or your organizations) bank balance.

Costs
It is traditional to assume that all costs can be reduced to a monetary value. This is not the only way to write a business plan. It is completely feasible to frame your cost benefit analysis with a broad set of values, such that financial costs can be explicitly traded off against ecological, carbon or well-being costs. Some of these extra-financial costs are difficult to quantify. Discussing formal systems for ecological accounting, carbon accounting, well-being, or other values that may or may not be countable, are beyond the scope of this document. However, we encourage you to define your values in your business plan, and where you anticipate taking a financial loss in pursuit of a particular value, make that explicit and quantify the financial cost. Farmers frequently pay too little attention to their own labor costs. Your time and energy is a finite and valuable recourse, so if your farm is to be successful, you must treat it as such.

Fixed and Variable Costs
To increase the outputs from a system, some of the inputs will need to be increased proportionately, and some will not. The fixed costs of production consists of all the costs you have to incur, regardless of how much you produce, where the variable costs of production are those that increase in proportion to how much you are producing. Financial costs are generally easier to identify as fixed or variable than labor costs. For example, purchasing a piece of equipment with a certain capacity would be a fixed cost until production exceeded the capacity of that machine. Labor also has fixed and variable components. For example, setting up, hitching and unhitching a tractor implement will take the same amount of time regardless of the land area that will be worked with it, whereas the time taken to use that implement in the field will be exactly proportional to the land area worked.

The ratio of fixed to variable costs has a strong impact on a business or industry. If we build businesses with high fixed and low variable costs, this creates a strong economic incentive to scale up and simplify. Huge monolithic operations distribute their fixed costs over large production runs, whereas small diverse operations incur a different set of fixed costs for everything they do. A collaborative network of small companies can address this by trading products and services, so instead of 10 farms all incurring the fixed costs of a plant nursery or a composting system, only one farm needs to pay these fixed costs if all the other farms buy plants or compost from them, and the total cost of production can be reduced for everyone.

The fixed and variable cost dynamics of information are particularly interesting as knowledge or data can be really expensive to create, and completely free to replicate. That is to say, it has a high fixed cost, and no variable cost. Learning new skills, like buying equipment, is a fixed cost, whereas applying your accumulated knowledge, skills and/or equipment to a problem is a variable cost. These dynamics of fixed and variable costs can go a long way to explaining the economic advantages to collaboration.

Capital and Operational Costs
Land is at one extreme of the spectrum from capital to operational costs, in that it will depreciate less through neglect than, say, a house. Whether you treat a piece of equipment as a capital or operational expense depends on how long it will last. Single use plug trays could be an operational expense, whilst a plug tray that lasts you many years could be a capital expense. Whether polythene for your poly-tunnel is a capital or an operational expense might depend on how exposed your site is, as well as the quality of plastic you buy.

Roughly, operational costs are those that you keep paying at least annually to run your business, whereas capital costs are one off payments that provide a benefit to your business over more than one year.

Making a Plan
Your plan should have a summary at the beginning, often called an executive summary, to make the person that doesn't have time to read the rest of your business plan feel important. Besides this, the minimum you will need is: You may also want:
 * An Operations Plan. Identify your product or service, and produce an operations plan that explains how you will produce and deliver that product or service.
 * A Marketing Plan. Identify your customers and explain how you will inform them that your product or service exists.
 * A Cash flow Forecast. Collect as much information as you can about what everything will cost, and what prices you are likely to charge, and put this all into a spreadsheet that forecasts your future bank balance.
 * A Business Objectives Overview. State your business goals, values and objectives.
 * A capital investment plan. Whether you are a startup or an existing business, you are likely to invest in infrastructure and equipment. This could be storage facilities, packing sheds, bottling line, food processing equipment, even an on-farm butchery. A capital investment plan works how much money you will need, how you will access funds, the period over which you will pay it back and the period of time over which the asset depreciates.
 * A Team Overview. Identify some or all of the people that will work on this business, with a brief description of their role, relevant experience and capacities.
 * An Organization/Farm Overview. List everything about you that is relevant to the business plan, including any stuff you own, how much money you have, and any established relationships or reputations.
 * An Industry Overview. Describe the trends and developments in your industry at large.
 * Competitor Overview. Describes your direct competition for customers, or lack thereof.
 * Customer Overview. Describe who your customers will be and give relevant information about them, separately to your marketing plan.
 * If there are any idiosyncratic features of your business idea or organization, such as planning considerations, co-operative or community decision making procedures, or technical innovations, you may want to include specific sections to discuss these.

Once you have a list of all the parts you need, you can base your to do list around gathering the information, writing sections, and developing the spreadsheets, charts, tables and diagrams you will need for each section.

Financial Projections
You should ideally decide how you want to use your data before you start collecting it. That way you can enter the information into a system in a usable format as you find it. The spreadsheet is a fundamental tool for business planning, so if you are not confident with basic formulas and spreadsheet conventions, take the time to watch some tutorials. Searching ‘spreadsheet tutorials’ on youtube should get you what you need.

The point of organizing information into categories of fixed, variable, capital and operational costs, is that you can then forecast the financial implications of investments or system changes. There are a number of accounting conventions that it is useful to be aware of to help you organize these spreadsheets.

Financial forecasting spreadsheets generally use the columns to represent time periods, moving forward in time from left to right, and list categories of income, expenses, cash reserve, assets, debts, and equity in the rows. The categories in the rows are generally divided into two main categories, called a profit and loss sheet, and a balance sheet.

Profit and Loss
The profit and loss sheet will start with all your income streams at the top, concluding with an income total. Below that you will list your operational costs, with an operational costs total row, followed by a row for profit, which is your income minus your operational costs.

The income and expenses categories on this sheet will reflect the particularities of your business. If you only anticipate a single income stream, from box payments or a milk round for example, income could be a single row, but if you have several different products or ways of selling produce, you will want separate income rows for each.

You may separate your expenses into categories such as production costs, sales costs, overheads, where each category is broken down into subcategories such as labor, packaging, fuel, etc, and each category concludes with a subtotal. Operational costs have a strong tendency to get complicated quickly. If you want a detailed breakdown of operational sundries, you can make a separate sheet for this and import the total from that sheet into the profit and loss sheet, to keep the latter relatively concise.

If you are able to separate these costs into their fixed and variable components, and identify the variable costs as a total variable cost per unit of production, you can calculate the variable costs by multiplying that cost per production unit by the total production required to meet a sales target. This can really help you to get a sense of the profitability, labor and cost implications for your business of different scales of operation you may strive for.

The final section at the bottom of this sheet will start with a gross profit row, which is total income minus total costs of goods sold. This is followed by some other costs, such as tax, debt servicing, etc, then conclude with a net profit row, which is the gross profit minus these additional costs.

Balance Sheet
A balance sheet tracks the change in value of your company over time, by listing the value of all your assets (what you have) and all your liabilities (what you owe).

Your assets will be categorized into fixed assets, which are physical things that retain value for more than one year, and current assets, which are the less tangible or consumable things, or the things you intend to sell within a year. For example, your bank balance is a current asset. A pile of wood would be a fixed asset if your intention was to build a building with it, whereas it would be a current asset if your intention was to sell it, or burn it for energy production.

Once you have identified all your fixed assets, it is important to identify which assets are appreciating or depreciating, and produce an estimate of this change in value over time.

You should factor the resale value of an asset in your depreciation calculation only if your intention is to sell it at some point in the future. However, for the purpose of financial forecasting, depreciation is not a measure of the change in resale value of an asset over time, so much as it is a method for distributing the cost of an asset over its useful lifetime. For a given piece of equipment or infrastructure, divide its cost by the number of years you expect it to be useful. The result of this calculation is the annual depreciation of that asset. For example, a concrete slab may cost £10,000, have no resale value at all, but be useful for 50 years. In this case your balance sheet would record that you invested £10,000 in a physical asset, and you would calculate the depreciation of that asset as £200/year. This calculation obviously does not track the resale value of that asset, it is a way to calculate its cost in relation to its utility over time.

Accessing Finance
Please see the Land Workers Alliance guide to Fundraising. As well as a general overview to accessing capital, and what funding options are available to which types of organization, it includes a list of organizations that finance ecological farms.

Support and Advice
If you need experienced and knowledgeable people to put focused work hours into your business plan, it can be well worth the money to pay professional agricultural consultants. This is partly because of the experience that these organizations can offer, but also because banks and funders may know and trust the opinions of these consultants.

However there are organizations that provide grant funded or low-cost mentors or advisors, and if you can access one, they’re likely to be a tremendous source of knowledge and support. There are also courses and forums where you can meet others from your sector, share knowledge and perhaps find peer support. Friends or family members can also help with aspects of your plan you find more challenging. Finally, the Landworkers’ Alliance is able to provide some support and advice to members and farmers, growers, foresters and land-based workers transitioning to agroecological systems. If this would be of use please use the contact form on the member support page of the website, and we will direct your enquirer to people best placed to assist you.